Great news for business finance seekers with viable business plans, is that in recent news stories it seems evident that First National Bank (FNB) is bent on lending money to small businesses even though so many entrepreneurs are so reluctant to request funding from financial institutions.
After a few years of tight belts from the banks it seems clear that they are once again saying to small businesses - hey, we are open for business!
SA’s president, Jacob Zuma and Finance Minister Pravin Gordhan have, in recent speeches, alluded to the ability of small businesses to create jobs in 2011, Zuma’s year of employment growth.
The CEOs of FNB Commercial, who run relationship banking segments which focus on providing lending to small businesses, yesterday (Thursday) said they had gained an edge over their competitors over the last year, by making strong strategic decisions. This had included taking equity stakes in their clients and not changing their criteria to extend loans to those businesses.
"We work in a very competitive space but I think our edge has come through us coping with the recession better than our peers did. We have a widely balanced portfolio and did not expose ourselves to assets that were overly risky at the time such as gold course estates," CEO of FNB Commercial’s Premium Business Banking segment, Michael Vacy-Lyle said.
This segment provides funding and guidance to companies with an annual turnover in excess of R10m.
The group also has a segment for companies which record a turnover of zero to R10m each year, called Business Banking.
But businesses are reluctant to take out loans, CEO of the Business Banking segment, Kirsty Davis said.
"We are working in a depressed market with many individuals being highly indebted," she said.
Still, FNB Commercial’s overall commercial advances grew 8% year-on-year from July last year to date, while the industry it operates in saw virtually no growth, the group’s overall in that period CEO Willie Miller said.
The question here I'm sure many of you will already be asking is how much of this is PR and how much of it will come through to you as a business owner going in to see your bank manager for the 3rd time, requesting that more funds will be made available for you to pay your suppliers while clients are slow to pay. I guess time will tell and we will quickly see of FNB's word really does translate to more money being available to you the entrepreneur.
Thursday, 24 March 2011
Saturday, 19 February 2011
a Business Plan for Business finance
For any entrepreneur, whether you are starting or growing your business, creating o a business plan is a key process, helping you to outline what will be done with which resources and ideally a justification of the demand, not to forget understanding the competition.
For many business owners, the business plan has the key purpose is to ensure finance for the business. Both business angels, venture capital firms and banks of course will be very keen to see a business plan before they consider whether to get to know you a bit better and if all goes well, start the negotiations regarding he terms of your way forward.
This guide explains what you should include in your business plan and how you should present it to potential investors, shareholders and your bank.
The essential elements of a business plan
Potential investors and lenders will examine your business plan closely to determine whether to risk their money.
There is no standard format but most plans include:
• An executive summary highlighting the main points - to catch people's attention.
• Details of key personnel with an organisational chart showing individual responsibilities.
• Market research - details of competitors and how your product or service fits into the market - eg who your potential customers are and why you think they will buy your product or service.
• Your marketing plan - how you are going to get your product or service in front of potential customers, together with any assumptions made when setting your targets.
• Financial information - eg key ratios. These can be used to compare your business' performance against industry benchmarks. It's also a good idea to give details of any major expenditure you have made on long-term assets and explain the reasons behind any changes in working capital items, such as stock, debtors and creditors. Remember to include balance sheet and profit and loss account details. Many lenders ask for three years' financial information. If this is not available, supply details about trading to date.
When seeking funding, include:
• A cashflow forecast indicating the amount of funding you need and why. For a start-up, include estimates of how much finance you will need for two to three years or until you start to make a profit. Indicate contingency funds that might be needed for rough patches. This is usually between 10 and 20 per cent of the total funding requirement.
• Financial forecasts for a three- to five-year period. Try to present this information in the same way as historical financial information, so that straightforward comparisons can be made.
• How a loan will be repaid, how investors can get their money back, and when.
Tailor your business plan to the target audience
A business plan serves a number of purposes and you may have to modify information depending on your target audience.
Your bank will be interested in:
• how you intend to repay a loan or overdraft
• what you are going to do with the money
• how the loan will help the business to grow
• what other loan or debt commitments you have
Most lenders operate a credit-scoring system. Make sure you give up-to-date and relevant information. A good relationship with your bank manager will not influence the credit score - the manager may have discretion to negotiate terms but not to change the decision itself.
Tell potential investors about:
• what you are going to do with the money
• when and how you are going to pay it back
• the expected return
• your other sources of funding
• your management's track record
Include a detailed forecast of your profits and cashflow.
Indicate to shareholders:
• the prospects for the share price
• how they may be able to sell their shares
• what dividend they can expect on their shares
• your management's track record
• what say they might have in the business
Demonstrate how they can exit with positive returns within three to five years.
Many businesses with growth potential fail to raise funds because they lack investment readiness, ie they do not understand the expectations of investors, cannot turn proposals into attractive opportunities or are unaware of financing sources.
Common reasons why business plans and loan applications fail include:
• a weak management team
• a flawed marketing plan
• unrealistic forecasts
• incomplete financial history
• poor presentation
Demonstrate your commitment to the business
If you want to attract outside funding, you need to show that you are committed to the business. You will also need to either show that you have a good credit history or, if not, explain why not.
Demonstrating your personal financial commitment
To attract funding, you need to invest your own money in your business. If you are not prepared to risk your own capital, a lender or investor is unlikely to want to risk theirs.
Therefore, your business plan needs to show the extent to which you are committing your own resources.
For example, you should mention that you are:
• investing your own cash in the business
• reinvesting profits from the business rather than taking dividends yourself
• using your own assets and guarantees to raise funds, eg by remortgaging your house
• finding funds from family, friends and existing investors
It is always helpful to detail the backing you already have from banks and other investors - especially independent investors. Remember that money attracts money. The more backers you have, the easier it is to attract new ones.
Getting the best from your business plan - key considerations
Your business plan is a tool you can use to attract new funds or as a strategy document. Give yourself the best chance of success by following these suggestions.
Doing your research
Before writing your plan ensure that you:
• check that the help you are applying for is still available - you may no longer qualify
• back up any assumptions you have made with thorough research
• find out your own credit rating by applying to Experian or Equifax for your credit file - a small charge is payable
Writing your business plan
Write your plan in a way that demonstrates your commitment to the business. Give it a professional feel by using graphs, pie charts, photos etc, but use only one font type and colour.
Your plan should:
• Be realistic - make sure you can justify any assumptions or projections and avoid being overly ambitious.
• Highlight any potential financial difficulties - warn your bank or lender if you anticipate that you may not be able to meet a repayment. There is every chance you will be able to come to some arrangement.
• Show how you intend to devise and implement effective cashflow arrangements, eg have clear procedures for chasing up any accounts receivable.
Once you have finished writing your plan, get someone to read it to spot spelling and presentation errors, and to ensure it's set out logically.
Getting professional help
Seek the help of your business adviser or accountant in compiling your business plan or loan application form. They will ensure that the financial information is compiled and presented correctly and that key areas stand out.
A specialist broker can help to find potential investors, usually for a fee and a percentage of funds raised.
Revising a business plan
Once you have presented the plan, ensure you review and revise it as your business grows.
If you are refused investment or a loan, take the criticism on board and consider how you might improve the plan for presenting in the future.
For many business owners, the business plan has the key purpose is to ensure finance for the business. Both business angels, venture capital firms and banks of course will be very keen to see a business plan before they consider whether to get to know you a bit better and if all goes well, start the negotiations regarding he terms of your way forward.
This guide explains what you should include in your business plan and how you should present it to potential investors, shareholders and your bank.
The essential elements of a business plan
Potential investors and lenders will examine your business plan closely to determine whether to risk their money.
There is no standard format but most plans include:
• An executive summary highlighting the main points - to catch people's attention.
• Details of key personnel with an organisational chart showing individual responsibilities.
• Market research - details of competitors and how your product or service fits into the market - eg who your potential customers are and why you think they will buy your product or service.
• Your marketing plan - how you are going to get your product or service in front of potential customers, together with any assumptions made when setting your targets.
• Financial information - eg key ratios. These can be used to compare your business' performance against industry benchmarks. It's also a good idea to give details of any major expenditure you have made on long-term assets and explain the reasons behind any changes in working capital items, such as stock, debtors and creditors. Remember to include balance sheet and profit and loss account details. Many lenders ask for three years' financial information. If this is not available, supply details about trading to date.
When seeking funding, include:
• A cashflow forecast indicating the amount of funding you need and why. For a start-up, include estimates of how much finance you will need for two to three years or until you start to make a profit. Indicate contingency funds that might be needed for rough patches. This is usually between 10 and 20 per cent of the total funding requirement.
• Financial forecasts for a three- to five-year period. Try to present this information in the same way as historical financial information, so that straightforward comparisons can be made.
• How a loan will be repaid, how investors can get their money back, and when.
Tailor your business plan to the target audience
A business plan serves a number of purposes and you may have to modify information depending on your target audience.
Your bank will be interested in:
• how you intend to repay a loan or overdraft
• what you are going to do with the money
• how the loan will help the business to grow
• what other loan or debt commitments you have
Most lenders operate a credit-scoring system. Make sure you give up-to-date and relevant information. A good relationship with your bank manager will not influence the credit score - the manager may have discretion to negotiate terms but not to change the decision itself.
Tell potential investors about:
• what you are going to do with the money
• when and how you are going to pay it back
• the expected return
• your other sources of funding
• your management's track record
Include a detailed forecast of your profits and cashflow.
Indicate to shareholders:
• the prospects for the share price
• how they may be able to sell their shares
• what dividend they can expect on their shares
• your management's track record
• what say they might have in the business
Demonstrate how they can exit with positive returns within three to five years.
Many businesses with growth potential fail to raise funds because they lack investment readiness, ie they do not understand the expectations of investors, cannot turn proposals into attractive opportunities or are unaware of financing sources.
Common reasons why business plans and loan applications fail include:
• a weak management team
• a flawed marketing plan
• unrealistic forecasts
• incomplete financial history
• poor presentation
Demonstrate your commitment to the business
If you want to attract outside funding, you need to show that you are committed to the business. You will also need to either show that you have a good credit history or, if not, explain why not.
Demonstrating your personal financial commitment
To attract funding, you need to invest your own money in your business. If you are not prepared to risk your own capital, a lender or investor is unlikely to want to risk theirs.
Therefore, your business plan needs to show the extent to which you are committing your own resources.
For example, you should mention that you are:
• investing your own cash in the business
• reinvesting profits from the business rather than taking dividends yourself
• using your own assets and guarantees to raise funds, eg by remortgaging your house
• finding funds from family, friends and existing investors
It is always helpful to detail the backing you already have from banks and other investors - especially independent investors. Remember that money attracts money. The more backers you have, the easier it is to attract new ones.
Getting the best from your business plan - key considerations
Your business plan is a tool you can use to attract new funds or as a strategy document. Give yourself the best chance of success by following these suggestions.
Doing your research
Before writing your plan ensure that you:
• check that the help you are applying for is still available - you may no longer qualify
• back up any assumptions you have made with thorough research
• find out your own credit rating by applying to Experian or Equifax for your credit file - a small charge is payable
Writing your business plan
Write your plan in a way that demonstrates your commitment to the business. Give it a professional feel by using graphs, pie charts, photos etc, but use only one font type and colour.
Your plan should:
• Be realistic - make sure you can justify any assumptions or projections and avoid being overly ambitious.
• Highlight any potential financial difficulties - warn your bank or lender if you anticipate that you may not be able to meet a repayment. There is every chance you will be able to come to some arrangement.
• Show how you intend to devise and implement effective cashflow arrangements, eg have clear procedures for chasing up any accounts receivable.
Once you have finished writing your plan, get someone to read it to spot spelling and presentation errors, and to ensure it's set out logically.
Getting professional help
Seek the help of your business adviser or accountant in compiling your business plan or loan application form. They will ensure that the financial information is compiled and presented correctly and that key areas stand out.
A specialist broker can help to find potential investors, usually for a fee and a percentage of funds raised.
Revising a business plan
Once you have presented the plan, ensure you review and revise it as your business grows.
If you are refused investment or a loan, take the criticism on board and consider how you might improve the plan for presenting in the future.
Wednesday, 2 February 2011
Startup financing: Where to get it?
Starting a business is seldom easy. Exciting yes as all you can think of at this stage are the opportunities and possibilities of the idea, how much profit you could be making and how great it will be not to have to answer to you grumpy manager any longer. With all the many perks to start a business of course there also the challenges and finding start-up finance will be one of the first that you will need to overcome. Today we know that there will be a range of possibilities from banks, to venture capital firms to business angels or private equity. Which way to turn will be the real question at this stage and probably for convenience sake the bank will be your first port of call as you know here to find it and have probably dealt with a bank before. But the benefits of other business finance sources should not be overlooked.
Once you have your business plan ready and have done a realistic financial forecast considering all the possible costs, the amount of investment you may need and how long you will talk to pay it back, should it be a lone then the next step will be to start the search for finance.
It's important that you start the search for Start up Capital with a good business plan that shows investors and lenders your company's potential. Follow your business plan with a thorough knowledge of the resources available and a determination to make your business a reality, and you should be on your way to uncovering a source that fits your new business's cash needs.
You should know that many financial institutions provide some type of small business loan program just for those like you who need Start up Capital to get their business off the ground. However in order for you to get your Start up Capital from a bank and fund your business you'll need a pretty solid business plan. You'll need to earn your Start up Capital from the bank by proving that your business will generate enough cash to make the loan payments. Each and every bank will have its own requirements that will differ from other banks, but if you will be able to articulate how exactly your business will succeed, and if you have decent credit, and maybe a co-signer as well, you may be able to get your Start up Capital through a small business bank loan.
When you're looking for Start up Capital, you should look at what the SBA or Small Business Administration has to offer. The Small Business Administration is a great resource that will provide you with information on requirements, on credit factors, on how to apply for loans and many other important things you'll need knowing. Giving them a look-see would be a great starting point before attempting to apply at a bank; the better prepared you'll be the easier it will be when you'll begin the application process.
Now let's not forget that a lot of small businesses get their Start up Capital from family and friends. Your family and friends usually want you to succeed and will believe in your business. However if they are indeed providing you with your Start up Capital then it would be wise to treat these relationships as real business relationships and plan how and when you'll repay their loans, the exact time frame and at what interest rate.
You could also get your Start up Capital form private angel investors and venture capital firms. These two work generally in the same way they will invest in the equity of your business and expect a return in the form of an acquisition, IPO or stock buy-back in the future.
The key to any of the above mentioned methods of getting Start up Capital is to have a well written business plan. Having a good business plan will show your would-be investors that you are serious about your business and that you can demonstrate the way you plan on making it successful.
Don't be overwhelmed by the process. You are in many ways bringing as much if not more to the table. Investors in what ever shape or form will benefit from your business in a big way if the venture takes of so make sure you get what is most beneficial for you and your business.
Once you have your business plan ready and have done a realistic financial forecast considering all the possible costs, the amount of investment you may need and how long you will talk to pay it back, should it be a lone then the next step will be to start the search for finance.
It's important that you start the search for Start up Capital with a good business plan that shows investors and lenders your company's potential. Follow your business plan with a thorough knowledge of the resources available and a determination to make your business a reality, and you should be on your way to uncovering a source that fits your new business's cash needs.
You should know that many financial institutions provide some type of small business loan program just for those like you who need Start up Capital to get their business off the ground. However in order for you to get your Start up Capital from a bank and fund your business you'll need a pretty solid business plan. You'll need to earn your Start up Capital from the bank by proving that your business will generate enough cash to make the loan payments. Each and every bank will have its own requirements that will differ from other banks, but if you will be able to articulate how exactly your business will succeed, and if you have decent credit, and maybe a co-signer as well, you may be able to get your Start up Capital through a small business bank loan.
When you're looking for Start up Capital, you should look at what the SBA or Small Business Administration has to offer. The Small Business Administration is a great resource that will provide you with information on requirements, on credit factors, on how to apply for loans and many other important things you'll need knowing. Giving them a look-see would be a great starting point before attempting to apply at a bank; the better prepared you'll be the easier it will be when you'll begin the application process.
Now let's not forget that a lot of small businesses get their Start up Capital from family and friends. Your family and friends usually want you to succeed and will believe in your business. However if they are indeed providing you with your Start up Capital then it would be wise to treat these relationships as real business relationships and plan how and when you'll repay their loans, the exact time frame and at what interest rate.
You could also get your Start up Capital form private angel investors and venture capital firms. These two work generally in the same way they will invest in the equity of your business and expect a return in the form of an acquisition, IPO or stock buy-back in the future.
The key to any of the above mentioned methods of getting Start up Capital is to have a well written business plan. Having a good business plan will show your would-be investors that you are serious about your business and that you can demonstrate the way you plan on making it successful.
Don't be overwhelmed by the process. You are in many ways bringing as much if not more to the table. Investors in what ever shape or form will benefit from your business in a big way if the venture takes of so make sure you get what is most beneficial for you and your business.
Monday, 10 January 2011
Business loan options for small business
There are several things to take into consideration when seeking financial advice and assistance from institutions or angel networks when starting out a new business venture, or when u require a loan to expand your existing business. Many entrepreneurs may not be aware of the fact that there are various loan options when requiring business finance.
In a great article on business finance sources on the all business website the following options are discussed.
Standard business loans can take on several different forms in specific situations:
Term loans are the most common general purpose loan. They're used for working capital, expansion, refinancing, and acquisitions. You'll repay them monthly over a term based on the expected lifespan of the assets you're purchasing. This straightforward loan is most common for larger amounts.
Short term loans are almost always set up for terms of one year or less, and are repaid in a lump sum at the end of the term, instead of monthly. They're usually for smaller amounts - less than R100,000 - and are best for seasonal inventory buildup or small investments with quick returns.
Equipment financing is generally easier to obtain then general lines of credit, simply because the equipment you buy serves as direct collateral for the loan. It's also less risky, in that if you are unable to make your payments, you don't have a lien against your entire business or your personal real estate: all you lose is the equipment you bought. Depending on the size of your business, equipment financing can cover huge expenses into the millions of dollars.
Lines of credit are more general business loans that are often set up to insure against cash flow problems. Instead of getting a check for the full amount of the loan, the financial institution will allow you to borrow up to a certain amount per year - you take out the money in increments as you need it. The flexibility comes at a cost, though: if you don't repay the loan balances fairly quickly, they can quickly become more expensive than other types of loans. Avoid using a line of credit for significant business improvements: they're designed for temporary cash shortfalls.
Credit card advances - in lending, this phrase does not mean taking out cash through your business credit card, although many businesses do that. Instead, it's a loan based on your track record and your expected future business. It's a good choice if your business has at least a three-year history of accepting credit cards. Because the credit card sales are such a good estimation of your future earnings, you'll be able to get a fairly good rate on a loan against your expected income.
While there are stringent federal guidelines about how banks and other lenders conduct business, there are no definitive standards as to how the various types of business loans are structured: terms and conditions may vary from one lender to the next, and minimum and maximum amounts can differ. Be sure you know exactly what conditions apply to each loan you're considering.
Factoring
Another option for many small businesses is factoring, also known as receivables financing. Factoring is basically selling your invoices to a third party: instead of waiting for your customers to pay, you can get the funds immediately - minus a small fee (3% to 5%) due to the factoring company. Typically you'll receive 80% of the invoice value upfront and the remaining value once the client pays.
Your business might be a good candidate for factoring if you have:
• Fewer than three years in business
• Good growth prospects but less than stellar cash flow
• Active accounts but slow paying customers
Having taken into consideration the above-mentioned options, you can now approach the financial institution of your choice with a better knowledge of what you require and what the needs are in accordance with your business. As an entrepreneur its is important to bare in mind that the financial institutions are there to help and assist, however it is of utmost importance that as a success entrepreneur and business owner/partner, that you approach them with a clear understanding of where you wish to take your business in the future.
In a great article on business finance sources on the all business website the following options are discussed.
Standard business loans can take on several different forms in specific situations:
Term loans are the most common general purpose loan. They're used for working capital, expansion, refinancing, and acquisitions. You'll repay them monthly over a term based on the expected lifespan of the assets you're purchasing. This straightforward loan is most common for larger amounts.
Short term loans are almost always set up for terms of one year or less, and are repaid in a lump sum at the end of the term, instead of monthly. They're usually for smaller amounts - less than R100,000 - and are best for seasonal inventory buildup or small investments with quick returns.
Equipment financing is generally easier to obtain then general lines of credit, simply because the equipment you buy serves as direct collateral for the loan. It's also less risky, in that if you are unable to make your payments, you don't have a lien against your entire business or your personal real estate: all you lose is the equipment you bought. Depending on the size of your business, equipment financing can cover huge expenses into the millions of dollars.
Lines of credit are more general business loans that are often set up to insure against cash flow problems. Instead of getting a check for the full amount of the loan, the financial institution will allow you to borrow up to a certain amount per year - you take out the money in increments as you need it. The flexibility comes at a cost, though: if you don't repay the loan balances fairly quickly, they can quickly become more expensive than other types of loans. Avoid using a line of credit for significant business improvements: they're designed for temporary cash shortfalls.
Credit card advances - in lending, this phrase does not mean taking out cash through your business credit card, although many businesses do that. Instead, it's a loan based on your track record and your expected future business. It's a good choice if your business has at least a three-year history of accepting credit cards. Because the credit card sales are such a good estimation of your future earnings, you'll be able to get a fairly good rate on a loan against your expected income.
While there are stringent federal guidelines about how banks and other lenders conduct business, there are no definitive standards as to how the various types of business loans are structured: terms and conditions may vary from one lender to the next, and minimum and maximum amounts can differ. Be sure you know exactly what conditions apply to each loan you're considering.
Factoring
Another option for many small businesses is factoring, also known as receivables financing. Factoring is basically selling your invoices to a third party: instead of waiting for your customers to pay, you can get the funds immediately - minus a small fee (3% to 5%) due to the factoring company. Typically you'll receive 80% of the invoice value upfront and the remaining value once the client pays.
Your business might be a good candidate for factoring if you have:
• Fewer than three years in business
• Good growth prospects but less than stellar cash flow
• Active accounts but slow paying customers
Having taken into consideration the above-mentioned options, you can now approach the financial institution of your choice with a better knowledge of what you require and what the needs are in accordance with your business. As an entrepreneur its is important to bare in mind that the financial institutions are there to help and assist, however it is of utmost importance that as a success entrepreneur and business owner/partner, that you approach them with a clear understanding of where you wish to take your business in the future.
Friday, 17 December 2010
Business Investment Checklist
Before offering business finance to a business plan, any investors will hopefully go through a rigorous testing process where the entrepreneur's business plan will be analysed, the financial forecasts scrutinised and the marketing research pondered upon. Whether an online business or regular, similar processes will be in place. You are putting your money into someone elses idea with the intention of bot contributing the business and also ultimately getting a healthy return. So what are you looking for from an investment point of view? Here are a a few issues that I hope you will consider before choosing whether or not to back the business in question.
In the spirit of transparency, please see my list below and let me know if you think I am missing any core issues.
The Basics
Can I understand the business?
what is the product?
what is the value?
who is the buyer and why would they buy?
can the buyer quantify the value? If so, what unit?
The Market
Is the market attractive?
Growth rates?
Profitability?
Is there a fundamental disruption that is the basis for the opportunity and limits the incubments' competitive response?
Market
Market --> SaaS, Open Source
Product --> core innovation
Is the product delivered in a buyer appropriate way?
open source for infrastructure
SaaS for a business app buyer
REST/SOAP/JavaScript for a web service
Is the core value tied to a technical innovation?
ex. HWVP's portfolio company examples = Baynote's collective intelligence algorithms and Move Networks' streaming protocols
Requirements and Obstacles
Are their frictions in....?
time and resources required to test the value proposition?
time and resources required to deploy?
time and risk to realize value?
Is there a good market comparable for both the business model and the exit multiple?
What unit scales the revenue model?
page views, sales heads, downloads, sessions?
Is the architecture scalable and does it leverage the best available infrastructure - EC2, S3, Rackspace, etc?
Dependencies
Are there exogenous dependencies?
carrier or MSO deals?
RFID deployments, etc?
Is there a market master?
WMT or MSFT or Dell....
The Entrepreneur
Who is the incumbent? How will they react?
Who are the other new companies in the space?
Is the team able and honest?
Prior track record of working together?
Is the CEO special?
What is his/her motivation, passion, strength?
Where do they need help and complement?
The Investment
Are the round size and pre-money reasonable?
Is the model reasonable (profit margins, growth, burn)?
Is the plan capital efficient?
how much money for 18 months?
margin of safety?
are their clear milestones in the plan that will allow for an objective assessment of value creation - ie a new investor
Opportunity and Possibility
Can this be a home run?
What are the core risks?
why will the company fail? is their a plan in place to mitigate such risks?
What are the KPIs - ie leading indicators to measure and track the company's progress?
Is the cap table clean and the paid-in capital reasonable?
Is the progress to date commensurate with the money in?
Has the money in to date been productive?
While I am sure there are risk and questions not raised above, the goal is to systematically measure a prospect against a consistent analytical framework that, hopefully, ensures smooth take-offs, flights, and landings.
In the spirit of transparency, please see my list below and let me know if you think I am missing any core issues.
The Basics
Can I understand the business?
what is the product?
what is the value?
who is the buyer and why would they buy?
can the buyer quantify the value? If so, what unit?
The Market
Is the market attractive?
Growth rates?
Profitability?
Is there a fundamental disruption that is the basis for the opportunity and limits the incubments' competitive response?
Market
Market --> SaaS, Open Source
Product --> core innovation
Is the product delivered in a buyer appropriate way?
open source for infrastructure
SaaS for a business app buyer
REST/SOAP/JavaScript for a web service
Is the core value tied to a technical innovation?
ex. HWVP's portfolio company examples = Baynote's collective intelligence algorithms and Move Networks' streaming protocols
Requirements and Obstacles
Are their frictions in....?
time and resources required to test the value proposition?
time and resources required to deploy?
time and risk to realize value?
Is there a good market comparable for both the business model and the exit multiple?
What unit scales the revenue model?
page views, sales heads, downloads, sessions?
Is the architecture scalable and does it leverage the best available infrastructure - EC2, S3, Rackspace, etc?
Dependencies
Are there exogenous dependencies?
carrier or MSO deals?
RFID deployments, etc?
Is there a market master?
WMT or MSFT or Dell....
The Entrepreneur
Who is the incumbent? How will they react?
Who are the other new companies in the space?
Is the team able and honest?
Prior track record of working together?
Is the CEO special?
What is his/her motivation, passion, strength?
Where do they need help and complement?
The Investment
Are the round size and pre-money reasonable?
Is the model reasonable (profit margins, growth, burn)?
Is the plan capital efficient?
how much money for 18 months?
margin of safety?
are their clear milestones in the plan that will allow for an objective assessment of value creation - ie a new investor
Opportunity and Possibility
Can this be a home run?
What are the core risks?
why will the company fail? is their a plan in place to mitigate such risks?
What are the KPIs - ie leading indicators to measure and track the company's progress?
Is the cap table clean and the paid-in capital reasonable?
Is the progress to date commensurate with the money in?
Has the money in to date been productive?
While I am sure there are risk and questions not raised above, the goal is to systematically measure a prospect against a consistent analytical framework that, hopefully, ensures smooth take-offs, flights, and landings.
Monday, 13 December 2010
What to include in a business plan
Although every business plan is different as the purpose and the audience for whom it is written for governs the structure and wording within the business plan, most business plans will still consists of three main sections.
- The Executive Summary
- The Main plot
- The Financials and Finance
Arguably, is the most important part of the plan, the Executive Summary normally consists out of one or two pages providing the reader with a synopsis of what is to come. This section can really be seen as a bite-size version of the plan. The reason why it is so important is that, as with most first impressions, the reader will quickly decide if this is something that is of interest or. If yes, the rest of the business plan will be read, if not, well, your plans is probably destined for the waste paper basket and you will have to continue your search for an sympathetic eye. Think of your executive summary as a longish elevator pitch.
The Main Plot provides the reader with a more detailed account of the important areas of your business. This is the ideal place for you to ensure and that you have thought through the functional areas of your business such as strategy, the products and services, the people, the competition the market, and most importantly your sales & marketing plan. Of course you are not only writing the business plan for yourself and this section will also be targeted at the chosen audience who you want to impress. Remember that most of the business plan can be used as a selling document as you are off course intending on getting a second party to take action. Whether the action is to provide you with finance or simply to impress a future business partner or grant provider. Get your fax correct and don’t oversell, as this can be highly off-putting.
The financials will consist of your Profit & Loss, Balance Sheet and Cash-flow forecasts with full assumptions. This section can often develop a life of its own, especially where you re trying to justify a certain amount of funding needed for the business. You must resist the temptation to sound to optimistic as lenders will quickly recognise when your forecasts are unrealistic. Make sure you consider the realities of delivering your products or services and the possibilities of obtaining new business.
One of my favourite quotes comes from John Chambers, CEO of Cisco Systems, "Deal with the world the way it is, not the way you wish it was." Another possible pot hole here is to not under estimate the amount of finance that your business needs. Its common for first time owners to over estimate their income for the first year and hence under forecast the amount of business finance needed. This often results in a red faced entrepreneur having to go back to bank or VC asking for an additional round of funding. Be realistic. Your business does not have to be cash machine to get start-up capital, it simply has to be viable while entering a market with potential.
Saturday, 4 December 2010
The reality of finding finance for a new business
Finding business finance for your business plan is often much more challenging that what people may realise. Luckily us entrepreneurs are a hardy bunch and a few obstacles and challenges along the way will 99% of the time simply make us more determined. You will obviously have written a business plan by now and then the fun really starts. But you should not confuse a challenging financing process with a poor business idea which just simply does not deserve the funding you are looking for. Make sure that you have done sufficient marketing research to determine that someone else that you and your friends & family believes in the product and that will be a demand for the product once it gets to the market.
I am providing this information because so many people here post requests for funding to cover 2 to 3 years of product creation or R&D. Then when they are ignored, they get angry.
Let's look at the typical stages in a successful company's financing. Although there are rare exceptions to this sequence, in most cases it looks like this:
If you are realistic about what types of scenarios attract investors, you won't get angry. Instead you will work to create an opportunity that will be attractive to investors at every stage.
If you think that you are going to attract money to cover your living expenses and provide a bit of fun money while you create the product for 2 or 3 years, you are in for nothing but frustration.
-Seed Round
At this stage you have no more than an idea. You are going to build the next Facebook or Google or Apple...only it will take a year or two of work before there is something that can be sold. Or maybe it's a dull little business which excites only you?
So, who comes in at this stage if you should be lucky enough to attract any money? The answer is the "3Fs", otherwise known as Family, Friends, and Fools. Yes, this means your parents and rich frat buddies from your days at Harvard or Yale. What's that? Your family is not wealthy and you didn't attend an Ivy League college? In that case, you are going to have to finance your seed stage the most common way: with a day job.
-Angel Round
Angels come in with money when you have started selling. They jump aboard because you now have tangible proof of concept. You're finally walking your talk. It's no longer all just hot air coming from the founder. Be honest, talk is cheap.
-Venture Capital A-Round
VCs step in when the business looks like it has potential for an IPO or acquisition a few years down the road.
-Venture Capital B-Round
Wall Street is starting to take notice of the company. Therefore, the VCs want to maximize its forward momentum.
-Venture Capital C-Round
The IPO is now in sight and the C-round is used to "fatten the pig" as much as possible in addition to preparing the company for it. Often this preparation includes replacing management with C-level officers who are known to and respected by Wall Street.
-The IPO
This is the big pay-off at the end of years of hard work. It means liquid stock selling at, hopefully, a high P/E multiple. (The second best alternative is to be acquired by a large company such as a member of the Fortune 1000.)
Welcome to Planet Earth. That's how 99% of start ups get through the seed stage and if you are having difficulty in succeeding here refer yourself to the opening paragraph and assess into which category you fall. Best of luck as you will probably need it.
I am providing this information because so many people here post requests for funding to cover 2 to 3 years of product creation or R&D. Then when they are ignored, they get angry.
Let's look at the typical stages in a successful company's financing. Although there are rare exceptions to this sequence, in most cases it looks like this:
If you are realistic about what types of scenarios attract investors, you won't get angry. Instead you will work to create an opportunity that will be attractive to investors at every stage.
If you think that you are going to attract money to cover your living expenses and provide a bit of fun money while you create the product for 2 or 3 years, you are in for nothing but frustration.
-Seed Round
At this stage you have no more than an idea. You are going to build the next Facebook or Google or Apple...only it will take a year or two of work before there is something that can be sold. Or maybe it's a dull little business which excites only you?
So, who comes in at this stage if you should be lucky enough to attract any money? The answer is the "3Fs", otherwise known as Family, Friends, and Fools. Yes, this means your parents and rich frat buddies from your days at Harvard or Yale. What's that? Your family is not wealthy and you didn't attend an Ivy League college? In that case, you are going to have to finance your seed stage the most common way: with a day job.
-Angel Round
Angels come in with money when you have started selling. They jump aboard because you now have tangible proof of concept. You're finally walking your talk. It's no longer all just hot air coming from the founder. Be honest, talk is cheap.
-Venture Capital A-Round
VCs step in when the business looks like it has potential for an IPO or acquisition a few years down the road.
-Venture Capital B-Round
Wall Street is starting to take notice of the company. Therefore, the VCs want to maximize its forward momentum.
-Venture Capital C-Round
The IPO is now in sight and the C-round is used to "fatten the pig" as much as possible in addition to preparing the company for it. Often this preparation includes replacing management with C-level officers who are known to and respected by Wall Street.
-The IPO
This is the big pay-off at the end of years of hard work. It means liquid stock selling at, hopefully, a high P/E multiple. (The second best alternative is to be acquired by a large company such as a member of the Fortune 1000.)
Welcome to Planet Earth. That's how 99% of start ups get through the seed stage and if you are having difficulty in succeeding here refer yourself to the opening paragraph and assess into which category you fall. Best of luck as you will probably need it.
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